Workers, Wages and the Labour Market: Question 10

Worked solution

Step 1: Recall how a national minimum wage works

A national minimum wage is a legal wage floor: firms must not pay below it, but they remain free to pay above it if the market wage is already higher. Whether a minimum wage has any effect on a labour market depends entirely on where it is set relative to the existing market equilibrium wage.

• If set above the equilibrium wage, it acts as a binding floor: quantity of labour supplied rises and quantity demanded falls, creating an excess supply of labour (unemployment).
• If set below the equilibrium wage, it is not binding: the market wage was already higher than the legal minimum, so nothing changes.

Step 2: Compare the minimum wage with the existing equilibrium

In this scenario, the market equilibrium wage for shop assistants is already $11.00 per hour, above the new national minimum wage of $9.00 per hour. Since firms are already paying more than the legal minimum, the minimum wage law does not require any firm to change what it pays.

Step 3: Evaluate each option

• A: incorrect. A minimum wage only causes unemployment when it is set above equilibrium; here it is set below.
• B: correct, since $9.00 per hour is below the $11.00 per hour equilibrium wage, the policy is not binding and has no effect on the wage rate or the quantity of shop assistants employed.
• C: incorrect, a minimum wage sets a wage floor, not a fixed wage; firms are never required to lower pay to match it.
• D: incorrect. A minimum wage does not raise firms’ willingness to employ workers; if anything, a binding minimum wage (set above equilibrium) would reduce the quantity of labour demanded, not increase it.

Final answer

Because the $9.00 per hour minimum wage is below the existing $11.00 per hour equilibrium wage, it is not binding and has no effect on the market, option B.